Rising Oil Prices Bittersweet

The recent increase in gas prices has exposed the unsettling dependence of the U.S. economy on cheap petroleum. Although many have called for drastic actions to reduce prices, the U.S. should not fight too hard to maintain its low gas prices forever. In the long run, prices that more accurately reflected the social costs of oil would be both an economic and an environmental benefit. For now, however, there is good reason to smooth the transition and to lobby oil-producing nations for increased production.

The price of oil has almost tripled over the last 14 months, from $11 to $30 a barrel, mainly due to supply constraints imposed by the cartel of Oil Producing and Exporting Countries (OPEC). The costs of heating oil and gasoline in the U.S. are rising substantially, with gas prices expected to reach $1.80 or even $2 a gallon by the summer. Although the price rise is smaller than those of the 1970s, some worry that the increases will fuel inflation--or convince Federal Reserve Chairman Alan Greenspan to raise interest rates--and choke off the economy's growth.

In one sense, an increase in gasoline prices is overdue. Among industrialized nations, America has abnormally low prices for gasoline, mainly because of lower gasoline taxes. These low prices do not reflect the full costs to society of gasoline use, which include air pollution, contributions to global climate change and dependence on foreign oil producers.

President Clinton is right to use this unusual opportunity for public discussion of energy policy to raise such long-term concerns, reiterating his proposals for tax credits for alternative fuels and energy efficiency. The potential risks of extreme weather events due to climate change make it prudent to reduce carbon dioxide emissions as an insurance policy against more dramatic changes. No matter what technique the U.S. eventually uses to reduce emissions, the price of gasoline to the consumer will have to increase.

This is not to say that we should celebrate the current price rise. Prices are high in most European nations because of gas taxes, not supply constraints, and these taxes send revenue to the governments rather than OPEC--revenue that can be used to build public transportation systems, fund alternative fuels research, mitigate environmental damage or compensate the poorer citizens and gas-dependent industries disproportionately affected by the tax.

However, we should not expect the U.S. economy to make a transition to higher gas prices instantaneously. For the short term, Energy Secretary Bill Richardson is planning to visit OPEC nations before their March 27 conference, and the U.S. should not hesitate to pressure the cartel to restore normal levels of production.

As for domestic initiatives, Clinton's proposal to create a heating-oil reserve in the Northeast would be more reasonable than selling oil from the Strategic Petroleum Reserve for general consumption, although the latter may be necessary at some point if prices continue to increase. Congress should approve Clinton's proposal as well as resist Texas Gov. George W. Bush's hasty proposal to repeal a 4.3-cent-per-gallon gas tax, which would take away valuable highway funds while at the same time passing savings on to oil producers rather than consumers.

The U.S. should take reasonable steps to moderate the price increase for the moment. For the long term, however, Americans should get used to the idea that a gallon of gasoline might not always be cheaper than a gallon of milk.